Line 42000 on your T1 is your net federal tax: the federal tax you owe on your taxable income after your non-refundable tax credits and other federal credits have been subtracted from the basic federal tax figure.1Canada.ca. Line 42000 – Net Federal Tax It is the middle step between the raw tax calculated on your bracketed income and your final bill, and it flows into your total payable on Line 43500.
Where Line 42000 Sits on Your Return
Net federal tax is not your final tax bill. Provincial or territorial tax, CPP contributions on self-employment, EI premiums, and any social benefits repayment are added on top of Line 42000 to build your total payable. Amounts already withheld from your paycheques, instalments you paid during the year, and refundable credits are then subtracted to produce either a refund or a balance owing.2Canada.ca. Line 43500 – Total Payable
So Line 42000 answers one specific question: after applying your federal credits, how much federal tax do you actually owe on the income you reported?
Start With Basic Federal Tax on Line 40600
The number that eventually becomes Line 42000 begins as Line 40600, your basic federal tax on taxable income. You get there by applying the federal brackets to your taxable income, one bracket at a time. For 2026, the lowest bracket rate dropped from 15 percent to 14 percent, a change worth up to $420 per filer.3Canada.ca. Delivering a Middle-Class Tax Cut The 2026 brackets are:
- 14% on taxable income up to $58,523
- 20.5% on income from $58,523 to $117,045
- 26% on income from $117,045 to $181,440
- 29% on income from $181,440 to $258,482
- 33% on income above $258,482
Each rate applies only to the slice of income falling inside that bracket. A person with $130,000 of taxable income pays 14 percent on the first $58,523, 20.5 percent on the amount between $58,523 and $117,045, and 26 percent on the remaining $12,955. The Federal Worksheet steps you through this. Because everything downstream depends on Line 40600, confirm your taxable income is right before doing the bracket math.
Credits That Bring Basic Federal Tax Down to Net Federal Tax
Between Line 40600 and Line 42000 sits a series of credits. Your federal non-refundable tax credits (basic personal amount, CPP and EI contributions, age amount, and the rest, calculated earlier in the return) come off first. Then the Federal Worksheet walks you through additional credits, each with its own line number.
Federal Dividend Tax Credit (Line 40425)
Dividends from taxable Canadian corporations qualify for the federal dividend tax credit. The credit amounts appear in boxes 12 and 26 of your T5 slips, and you claim the total on Line 40425.4Canada.ca. Federal Dividend Tax Credit Foreign dividends do not qualify. If dividends were paid to you without a slip, the Line 40425 chart on the Federal Worksheet lets you calculate the credit yourself.
Federal Foreign Tax Credit (Line 40500)
If you paid income tax to another country on income that also appears on your Canadian return, Line 40500 is where you claim relief from double taxation. You calculate the credit on Form T2209. One catch: if you took a deduction on Line 25600 because a tax treaty made that income non-taxable in Canada, you cannot claim a foreign tax credit on the same income.5Canada.ca. Federal Foreign Tax Credit – Personal Income Tax
Federal Political Contribution Tax Credit (Line 41000)
Contributions to a registered federal political party, riding association, or candidate in a federal election qualify. The credit maxes out at $650, which you reach at total contributions of $1,275.6Canada.ca. Line 41000 – Federal Political Contribution Tax Credit Smaller amounts use the sliding chart on the Federal Worksheet.
Investment Tax Credit (Line 41200)
Line 41200 captures the investment tax credit, which applies to specific activities: qualifying scientific research and experimental development expenditures, certain machinery or equipment used in Atlantic Canada, and employing eligible apprentices, among others.7Canada.ca. Line 41200 – Investment Tax Credit Most individual filers only encounter it when a T3 or T5013 slip carries an amount in the relevant boxes.
Once every applicable credit is subtracted from your Line 40600 figure, what remains is the number you enter on Line 42000.
What Happens After Line 42000
Your net federal tax becomes the first entry in the block that produces Line 43500, total payable. The CRA adds Lines 42000 through 42800 (through 43200 for Yukon residents) to reach that total.2Canada.ca. Line 43500 – Total Payable The items stacked on top of Line 42000 include:
- CPP contributions payable on self-employment and other earnings (Line 42100)
- EI premiums payable on self-employment and other eligible earnings (Line 42120)
- Social benefits repayment, such as an OAS or EI clawback (Line 42200)
- Provincial or territorial tax, calculated on a separate form (Line 42800)
Total credits on Line 48200, which include tax withheld at source and instalments already paid, come off Line 43500. If credits exceed total payable, the difference is your refund on Line 48400.8Canada.ca. Line 48400 – Refund If total payable exceeds credits, you have a balance owing.
Alternative Minimum Tax Can Replace the Regular Calculation
Canada’s alternative minimum tax is a parallel calculation designed to ensure filers who benefit from large deductions or preferential capital gains treatment still pay a minimum level of federal tax. If your AMT figure comes out higher than your regular federal tax, you pay the AMT amount, and the difference can be carried forward as a credit against regular tax in future years.
The reformed AMT rules that took effect for 2024 and later years raised the AMT rate from 15 percent to 20.5 percent and lifted the basic exemption from $40,000 to the start of the fourth federal bracket ($173,205 in 2024, indexed after that). Capital gains are included at 100 percent for AMT purposes, most non-refundable credits are limited to 50 percent, and charitable donation credits are limited to 80 percent. When AMT applies, its result feeds into the federal tax calculation before you arrive at Line 42000.
Instalment Payments Triggered by Your Net Federal Tax
Line 42000 is the biggest driver of whether the CRA expects you to pay by quarterly instalments. If your net tax owing exceeds $3,000 in 2026 and also exceeded $3,000 in either 2025 or 2024, you fall inside the instalment rules. Quebec residents cross the line at $1,800.9Canada.ca. Required Tax Instalments for Individuals Instalments are due March 15, June 15, September 15, and December 15. Self-employed filers, landlords, and retirees whose pensions have too little tax withheld are the people most likely to be caught by this.
Late Filing Penalties and Interest on a Balance Owing
If Line 42000 helps push you into a balance owing on Line 43500 and you file late, the CRA charges 5 percent of the unpaid tax plus 1 percent for each full month the return remains outstanding, up to 12 months.10Justice Laws Website. Income Tax Act RSC 1985 c 1 (5th Supp) – Section 162 A return filed a full year late can carry a 17 percent penalty on the unpaid balance.
Repeat late filers face doubled penalties. If the CRA issued a formal demand to file and you were already penalized for late filing in any of the three preceding years, the base rate becomes 10 percent plus 2 percent per month for up to 20 months, which tops out at 50 percent.10Justice Laws Website. Income Tax Act RSC 1985 c 1 (5th Supp) – Section 162
Compound daily interest also runs on any unpaid balance. The prescribed interest rate for overdue taxes in the first quarter of 2026 is 7 percent.11Canada.ca. Interest Rates for the First Calendar Quarter – Canada.ca Interest begins the day after the filing deadline. A late-filed return that produces a refund carries no late-filing penalty, so if you cannot pay in full, filing on time and paying what you can is the cheaper option.